Enhancing the influence of creditors
The expansion of creditor participation in insolvency proceedings represents one of the central aspects of the ESUG. One of the principal planned new features is the introduction of a preliminary creditors’ committee in insolvency proceedings. Following its appointment, this committee may influence items such as the selection of the insolvency administrator. In a related change, an insolvency administrator may no longer be ruled out as insufficiently independent simply because he or she was proposed by the debtor or a creditor or had generally advised the debtor prior to the filing of the insolvency petition.
The new provisions regarding the preliminary creditors’ committee are included as part of the preservation measures (Sec. 21, 22a German Insolvency Act (Insolvenzordnung “InsO”) – new version). Under these provisions, a preliminary creditors’ committee must be appointed by the court if the debtor satisfied two of the following three threshold values during the prior financial year (threshold value model): total assets of EUR 4,840,000 following the deduction of losses reported on the asset side within the meaning of Sec. 268, para. 3 German Commercial Code (Handelsgesetzbuch “HGB”), turnover of EUR 9,680,000 during the twelve months prior to the balance sheet date, or at least 50 employees on average during the preceding year. In addition, a preliminary creditors’ committee is to be appointed upon application by the debtor, the preliminary insolvency administrator or a creditor, provided that the persons who may be considered for the preliminary creditors’ committee are named at the same time and the application includes declarations of consent from the potential members. A committee will not be appointed in the event business operations have already been suspended, the expense would be too great given the expected insolvency estate or if this would adversely affect the debtor's financial situation.
For purposes of identifying potential members of the preliminary creditors' committee, the debtor must attach a complete listing of its creditors including an indication of creditors who may be considered for appointment to the committee (Sec. 13 InsO - new version).
If the court is required to review whether the appointment of a preliminary creditors' committee is an option, the question arises as to what information the court should consider in making its decision. Generally, at the point when the court conducts its review, only the insolvency petition and the list of creditors are available to the court, as a preliminary insolvency administrator has yet to be appointed and a financial status report is not yet available. Accordingly, in the case of uncertainty the court must itself conduct investigations. This can consume valuable time. In particular, in cases where business operations are ongoing the loss of time associated with the process provided for appointing a preliminary creditors' committee may even endanger the chances of restructuring.
Conclusion
Despite these shortcomings, the option of appointing a preliminary creditors' committee must be generally viewed favourably in practice. However, this option is likely to be used only in rare instances given the difficulties discussed above and the high threshold values.
Further ESUG issues...
(free for publication)
The new provisions regarding the preliminary creditors’ committee are included as part of the preservation measures (Sec. 21, 22a German Insolvency Act (Insolvenzordnung “InsO”) – new version). Under these provisions, a preliminary creditors’ committee must be appointed by the court if the debtor satisfied two of the following three threshold values during the prior financial year (threshold value model): total assets of EUR 4,840,000 following the deduction of losses reported on the asset side within the meaning of Sec. 268, para. 3 German Commercial Code (Handelsgesetzbuch “HGB”), turnover of EUR 9,680,000 during the twelve months prior to the balance sheet date, or at least 50 employees on average during the preceding year. In addition, a preliminary creditors’ committee is to be appointed upon application by the debtor, the preliminary insolvency administrator or a creditor, provided that the persons who may be considered for the preliminary creditors’ committee are named at the same time and the application includes declarations of consent from the potential members. A committee will not be appointed in the event business operations have already been suspended, the expense would be too great given the expected insolvency estate or if this would adversely affect the debtor's financial situation.
For purposes of identifying potential members of the preliminary creditors' committee, the debtor must attach a complete listing of its creditors including an indication of creditors who may be considered for appointment to the committee (Sec. 13 InsO - new version).
If the court is required to review whether the appointment of a preliminary creditors' committee is an option, the question arises as to what information the court should consider in making its decision. Generally, at the point when the court conducts its review, only the insolvency petition and the list of creditors are available to the court, as a preliminary insolvency administrator has yet to be appointed and a financial status report is not yet available. Accordingly, in the case of uncertainty the court must itself conduct investigations. This can consume valuable time. In particular, in cases where business operations are ongoing the loss of time associated with the process provided for appointing a preliminary creditors' committee may even endanger the chances of restructuring.
Conclusion
Despite these shortcomings, the option of appointing a preliminary creditors' committee must be generally viewed favourably in practice. However, this option is likely to be used only in rare instances given the difficulties discussed above and the high threshold values.
Further ESUG issues...
- From a provider of financing to an owner of the business: the debt-equity swap
- Self-Administration: from the exception to the rule
- Structuring shareholders’ rights in insolvency proceedings
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